This case arises from the sale of common stock pursuant to a July 1990 Initial Public Offering ("IPO") by a company called In-Store Advertising, Inc. ("In-Store"). Plaintiffs are a putative class of purchasers who claim that they were induced into buying In-Store securities through misrepresentations in In-Store's IPO Prospectus.

Plaintiffs commenced this action on August 29, 1990 ("August 29, 199 Complaint"), one day following In-Store's announcement that its operating results were substantially below prior projections. The original defendants consisted of: (1) Individual senior officers and directors of In-Store who are alleged to have controlled In-Store and who signed the Company's registration statement; (2) Institutions, including Chemical Venture, Wind Point, ML, and CapCities, which are alleged to have been beneficial owners of a majority of In-Store stock and therefore to have had control directly or indirectly over In-Store and its Board of Directors; and (3) Lead underwriters for the IPO, Alex, Brown & Sons, Inc. and Bear, Steam & Co., Inc.

The August 29, 1990 complaint alleged violations of Sections 11 and 12(2) of the Securities act and Section 10(b) of the Exchange Act, as well as state claims for fraud and negligent misrepresentation. . This complaint alleged that the Registration Statement and Prospectus contained misrepresentations concerning, among other things, In-Store's true prospects for revenues and income during 1990, and its portrait as an established company. August 29, 1990 Complaint PP 24-31, 34, 35, 39.

As a result of discovery undertaken pursuant to these complaints, In-Store produced to plaintiffs in early 1991 documents including the "Board books." Affidavit of Ellen Wahl Parker, sworn to September 10, 1993 P 5. In addition, on or about May 1, 1991, Peat Marwick produced, in response to a non-party subpoena, all of its workpapers (excluding its proprietary audit programs) for its audit of In-Store's 1989 financial statements and its review of In-Store's first three 1990 quarterly financial statements. Id. P 4. During this time, plaintiffs retained an accounting expert to explore the potential of claims against Peat Marwick, who found an insufficient basis at that time to press such claims. Plaintiffs' Br. at 9.

Plaintiffs assert that, despite their expert's diligent efforts, prior to June 1993 they had insufficient information concerning the deferred billing and improper revenue recognition schemes that constitute the basis of the present claims against Peat Marwick to know of the potential of such claims. This position is untenable in light of the history of this litigation. The 1993 Complaint alleges that "In-Store's 'deferred billing' arrangement . . . "was, in part, a cover-up for the altered contracts and improper recognition of revenues in advance of performance," P 131(II)(c)) July 1993 Complaint, and that the 1989 financial statements in the Prospectus contained material misrepresentations due to "improper recognition of revenues in advance of performance and billing." Id. P 152. The January 1991 Complaint, however, also contained allegations of the same deferred billing practices and revenue recognition errors with respect to the 1989 financial statements. For example, the January 1991 Complaint specifically accused In-Store of engaging in deferred billing and extended payment terms "in order to inflate reported revenues and net income." Jan. 1991 Complaint P 27; see also Jan. 1991 Complaint PP 33, 36, 48, 49. Thus, even as of January 1991, plaintiffs cannot claim to have been entirely in the dark with respect to the fraudulent scheme underlying their current claims against Peat Marwick.

In sum, plaintiffs' possession of the Board books and Peat Marwick workpapers that comprise the source of many of their allegations against Peat Marwick, along with plaintiffs' failure to pursue discovery that would have led to the additional facts underlying their claims that plaintiffs allege they did not learn until June 1993, combine to convince this Court that plaintiffs had constructive knowledge of Peat Marwick's alleged fraud no later than August 27, 1991. Accordingly, their federal securities law claims against Peat Marwick are time-barred.
*fn5"

We noted in Lenz that statutes of limitations exist in securities law to prevent investors, even unsophisticated ones, from sticking their head in the sand, in ostrich-like denial of events which notify them of the probability of fraud. Limitations of actions, however, also function to prevent investors and their counsel, sophisticated in the ways of complex securities litigation, from uncovering a general fraudulent scheme, initiating large scale lawsuits and concomitant discovery, and then, as a strategic ploy, delaying in the prosecution of potential claims about which they knew or should have known. Therefore, that part of defendants' summary judgment motion seeking dismissal of plaintiffs' federal securities law claims is granted, and that part of defendants' summary judgment motion seeking dismissal of plaintiffs' state law claims is denied with leave to resubmit in accordance with the contingencies discussed supra at n. 1.

SO ORDERED.

Dated: New York, New York

December 30, 1993

KENNETH CONBOY, U.S.D.J.

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